I need some advise regarding my retirement plan

[xmanz3]

I'm working hard to retire at an early age and I would like your comments or suggestions regarding my situation in order to accelerate the process.

I'm 32 and my wife is 34. No kids
Current annual joint income: $135k (income should increase tremendously in 2007)


Assets:
401k- $50k (company match up to 3%)
ROTH IRA- $8k (we will apply max contribution every year)
Emigrant Direct- $15k @ 5.05%
USAA MM- $5k @ 4.95%
Mutual Funds- $4k
UFB MM- $4k @ 5.36%

Properties:
Primary Residence
Mortgage Balance: $317k @ 5.75 30 yr fixed Market value: $370k

Rental Property
Mortgage Balance: $137k @5.75 30 yr fixed Market value: $155k

2 Cars paid for (don't plan to purchase new cars for the next 10 yrs)

Debt:
1 Credit Card Balance:$5k @ 3.99 until 03/2008

NO STUDENT LOANS, NO PERSONAL LOANS, NO HELOC, NO SECOND MORTGAGE

I decided to pay off my CC debt by the end of 2006. Once I'm done with that, I will max out both ROTH IRA's before April 15th 2007.

I'm also looking at continue buying real estate property. Right now it seems that most of the deals I could find I would only be able to obtain enough money from rent to cover P&I, insurance, and taxes. No positive cashflow for at least a year, but the properties would continue going up in value in that area.

I really enjoy RE and my plan is to buy as many properties, pay off the mortgages in 20 yrs or less, and once there are no mortgages I would be able to get positive cashflow for at least 8 properties.

Basically, when I turn 52 I would be getting at least $1000 on each property and that would be $96,000 a year not including taxable and non taxable retirement accounts.

I would greatly appreciate your inputs!

Thanks!

Xavier

 

[brewer12345]

Do the current properties flow cash? How secure are your jobs? Any plans for kids?

Looks OK, but you look somewhat liquidity-constrained. How well would you hold up if one of the rentals got into trouble or one of you lost your job?

I'd be very, very slective on more RE deals. I've no idea what your local market looks like, but many areas of the US will have heavy foreclosure activity in thenext couple of years, which should provide bargains if you are waiting with cash in hand.

 

[xmanz3]

My only rental property is flowing a positive cash flow of $50 a month, but the contract would be renew on February and the positive cash flow will go up to $150 a month. As of now, there are no plan for kids. Jobs are fairly secure.

As far as the stability of the rental property, the condo is located in a great location in Atlanta and people are always looking to rent in that area. In the event that the property is vacant, we have funds to pay the rent until we get a new tenant.

In the event that one of us lose a job, we have a 6 months emergency fund.

 

[Linney]

Looks like you'll be reaching the Roth IRA phaseout soon if your income is increasing that rapidly. You might want to think about where you are going to save your money when you hit that limit. For me, it meant opening an account at Vanguard. A favorite source for information on the phaseout range and other Roth IRA questions is www.fairmark.com/rothira

 

[Nords]

Looks like you'll be reaching the Roth IRA phaseout soon if your income is increasing that rapidly. You might want to think about where you are going to save your money when you hit that limit.

Nondeductible IRAs are still an option, and perhaps later could be converted to Roths.

 

[califdreamer]

I'd be very, very slective on more RE deals.

xman,

I would just underline brewer's point. I've been investing in RE for the last 10+ yrs and the vast majority of the deals have worked out well. It's a little trickier now. I don't invest in single-family residences. I think now is likely a particularly poor time to invest in SFRs unless you're able to buy at a substantial discount. I've even had a little difficulty finding satisfactory multi-family deals during the last couple of years.

Make sure you do serious homework before you make your next RE investment. My personal view is it's not a bad thing to go in with partners on multi-family properties rather than investing in SFRs. Study the market you're going to invest in and keep an especially keen eye out for new construction that will be your competition. I don't know what the condo mkt is like in Atlanta (IIRC that's where you are) now. I know in many markets it's really tough.... too much new construction and too many conversion units.

For the shrewd investor I think there are still profitable RE deals to be found.

 

[milmoose]

I agree that RE is an important part of your long-term asset allocation, but you should immediately focus on increasing your allocation to equities.

By my calculations, you have $71K in RE, $62K in Equities (assuming 100% equity allocation in 401k and Roth, which may not be correct) and $24K in fixed income/short term. For a total RE/Equity/Fixed asset allocation of 45%/39%/15%. This is sub-optimal for a 34 year old.

I would immediately reduce your reliance on "Emergency Funds" and shift some (perhaps $10-15K) of that to long-term investments in equity index funds. Aim to get your asset allocation closer to 40%/55%/5% over the next two years.

I also live in Atlanta and I see very few SFRs selling for greater than a 6% cap rate (rents are also difficult to increase due to oversupply, especially in Midtown). Remember that historically, 88% of the return from RE investments has come from income and only 12% from appreciation. By locking in a 6% cap at today's prices, I think you are locking in a relatively low unlevered return. High leverage can magnify return, but also magnifies risk whereas adding some small-cap value or Interenational Value equities to your allocation might reduce your total portfolio risk and also add return.

Also consider a small allocation to an Absolute Return or Managed COmmodity Futures fund in the future. 5-10% of assets. Personal favorites are SWHEX and PCRIX.

- M

 

[boutros]

Looks like you'll be reaching the Roth IRA phaseout soon if your income is increasing that rapidly. You might want to think about where you are going to save your money when you hit that limit. For me, it meant opening an account at Vanguard. A favorite source for information on the phaseout range and other Roth IRA questions is www.fairmark.com/rothira

If you reach the phaseout you may want to consider a non deductible IRA for the next couple of years. The way the law is written currently anyone regardless of income level will be able to convert a traditional IRA to a Roth in or around 2009 or 2010 (I forget which or both). With a nondeductible IRA contibution you would only be taxed on the growth when converting (assuming you have no other traditional/rollover IRAs.

 

[xmanz3]

That would definitely be an option once we reached the cap.